Interior of Ozarks cabin housing six people in Missouri
Ilargi: Let me see. I think there’s three separate issues today.
First of all, there was of course the Goldman early morning single malt reverie this morning (but not for the employees!). Earnings, profits, it was all through the roof. Members of Congress were celebrating right along with the Paulsons and Rubins and that sort of "ilk". Come to think of it, does anyone remember "Representative Paul Kanjorski, a senior Democrat on the House Financial Services Committee"? Look him up on YouTube, he was a celebrated contrarian Capitol Hill voice just months ago. Now, though, not so much. He comes out in praise of Goldman's profits:: "Is there a law in the United States that you can't make profits?". Kanjorski said he hoped Goldman's profits were a sign of economic recovery and a possible bellwether for other sectors. "I have great hope General Motors has great profits next year...."
Well, Kanjorski, I don't get how you can say such things without demanding that Goldman pay back its AIG, taxpayer funded, pay-off. And I’m getting sick and tired of having to say and repeat that ALL government bail-outs need to be repaid, not just parts of them. Right now, the $10-$20 billion in bonuses Goldman intends to hand over to its employees come from the taxpayer, dollar for dollar.
What sort of theater am I watching here anyway? All this above is evident for everybody. But something else happened today as well. Goldman announced those great numbers, but the Dow was down initially. It ended positive, but just by 0.33%. Goldman was up 0.15%. Do you realize what that means?
A lot of people bought Goldman stock today, that’s for sure, Yesterday and today, all kinds of rosy stories came out, culminating in this morning's outsize profits. But if all these people bought in, and there's no doubt they did, why did the stock rise only 0.15%? To figure that one out, think back to yesterday's post, Bull Call, which contains a Reuters article which has this line: Goldman Sachs Group Inc executives sold almost $700 million worth of stock since the collapse of rival Lehman Brothers last year....
Yes, that's what happened again today. Nothing else make sense. While all the small investors were buying, the big boys were selling. Get out of that stock, guys, before it burns you. If it were as hot as you think, it would have gone up 10%-20%. It didn't. It's a media spin tale meant to fleece you. Stay away.
Mortimer Zuckerman's Wall Street Journal piece attracts plenty attention, and rightly so; if anything, not nearly enough. Still, it leaves far too many issues unaddressed, far too many questions unanswered. So much so that it makes me wonder why the paper (is it still a paper?!) runs it. Is it to make people belive this is all there is?
Here are a few of his 10 reasons "we are in even more trouble than the 9.5% unemployment rate indicates":
- June's total assumed 185,000 people at work who probably were not.
- No fewer than 1.4 million people wanted or were available for work in the last 12 months but were not counted. Why? Because they hadn't searched for work in the four weeks preceding the survey.
- The average length of official unemployment increased to 24.5 weeks, the longest since government began tracking this data in 1948. The number of long-term unemployed (i.e., for 27 weeks or more) has now jumped to 4.4 million, an all-time high.
Read it and tell me what you think. Me, I don’t trust it.
The most valuable piece today comes from Mish. He writes about something I’ve been thinking about for a long time, but never thought there'd be a way to catch the numbers, let alone in a graph. Mish's idea: translate housing prices into a credible format for inflation numbers. And he did what I doubted could be done at all. Here’s the graph that should solve the inflation/deflation issue once and for all:
Or, alternatively, you can cling your dead cold hands around Goldman's recovery. Your choice.
Well, then again, not really, is it? There's one truth, and millions of fantasies. And fantasies are nice, but you got to know how to pick your moments.
PS: the title is a quote from Henry M. Gouge, 1830
The Economy Is Even Worse Than You Think
The average length of unemployment is higher than it's been since government began tracking the data in 1948.
The recent unemployment numbers have undermined confidence that we might be nearing the bottom of the recession. What we can see on the surface is disconcerting enough, but the inside numbers are just as bad.
The Bureau of Labor Statistics preliminary estimate for job losses for June is 467,000, which means 7.2 million people have lost their jobs since the start of the recession. The cumulative job losses over the last six months have been greater than for any other half year period since World War II, including the military demobilization after the war. The job losses are also now equal to the net job gains over the previous nine years, making this the only recession since the Great Depression to wipe out all job growth from the previous expansion.
Here are 10 reasons we are in even more trouble than the 9.5% unemployment rate indicates:
- June's total assumed 185,000 people at work who probably were not. The government could not identify them; it made an assumption about trends. But many of the mythical jobs are in industries that have absolutely no job creation, e.g., finance. When the official numbers are adjusted over the next several months, June will look worse.
- More companies are asking employees to take unpaid leave. These people don't count on the unemployment roll.
- No fewer than 1.4 million people wanted or were available for work in the last 12 months but were not counted. Why? Because they hadn't searched for work in the four weeks preceding the survey.
- The number of workers taking part-time jobs due to the slack economy, a kind of stealth underemployment, has doubled in this recession to about nine million, or 5.8% of the work force. Add those whose hours have been cut to those who cannot find a full-time job and the total unemployed rises to 16.5%, putting the number of involuntarily idle in the range of 25 million.
- The average work week for rank-and-file employees in the private sector, roughly 80% of the work force, slipped to 33 hours. That's 48 minutes a week less than before the recession began, the lowest level since the government began tracking such data 45 years ago. Full-time workers are being downgraded to part time as businesses slash labor costs to remain above water, and factories are operating at only 65% of capacity. If Americans were still clocking those extra 48 minutes a week now, the same aggregate amount of work would get done with 3.3 million fewer employees, which means that if it were not for the shorter work week the jobless rate would be 11.7%, not 9.5% (which far exceeds the 8% rate projected by the Obama administration).
- The average length of official unemployment increased to 24.5 weeks, the longest since government began tracking this data in 1948. The number of long-term unemployed (i.e., for 27 weeks or more) has now jumped to 4.4 million, an all-time high.
- The average worker saw no wage gains in June, with average compensation running flat at $18.53 an hour.
- The goods producing sector is losing the most jobs -- 223,000 in the last report alone.
- The prospects for job creation are equally distressing.
The likelihood is that when economic activity picks up, employers will first choose to increase hours for existing workers and bring part-time workers back to full time. Many unemployed workers looking for jobs once the recovery begins will discover that jobs as good as the ones they lost are almost impossible to find because many layoffs have been permanent. Instead of shrinking operations, companies have shut down whole business units or made sweeping structural changes in the way they conduct business.
General Motors and Chrysler, closed hundreds of dealerships and reduced brands. Citigroup and Bank of America cut tens of thousands of positions and exited many parts of the world of finance Job losses may last well into 2010 to hit an unemployment peak close to 11%. That unemployment rate may be sustained for an extended period Can we find comfort in the fact that employment has long been considered a lagging indicator? It is conventionally seen as having limited predictive power since employment reflects decisions taken earlier in the business cycle. But today is different. Unemployment has doubled to 9.5% from 4.8% in only 16 months, a rate so fast it may influence future economic behavior and outlook.
How could this happen when Washington has thrown trillions of dollars into the pot, including the famous $787 billion in stimulus spending that was supposed to yield $1.50 in growth for every dollar spent? For a start, too much of the money went to transfer payments such as Medicaid, jobless benefits and the like that do nothing for jobs and growth. The spending that creates new jobs is new spending, particularly on infrastructure. It amounts to less than 10% of the stimulus package today.
About 40% of U.S. workers believe the recession will continue for another full year, and their pessimism is justified. As paychecks shrink and disappear, consumers are more hesitant to spend and won't lead the economy out of the doldrums quickly enough. It may have made him unpopular in parts of the Obama administration, but Vice President Joe Biden was right when he said a week ago that the administration misread how bad the economy was and how effective the stimulus would be. It was supposed to be about jobs but it wasn't. The Recovery Act was a single piece of legislation but it included thousands of funding schemes for tens of thousands of projects, and those programs are stuck in the bureaucracy as the government releases the funds with typical inefficiency.
Another $150 billion, which was allocated to state coffers to continue programs like Medicaid, did not add new jobs; hundreds of billions were set aside for tax cuts and for new benefits for the poor and the unemployed, and they did not add new jobs. Now state budgets are drowning in red ink as jobless claims and Medicaid bills climb. Next year state budgets will have depleted their initial rescue dollars. Absent another rescue plan, they will have no choice but to slash spending, raise taxes, or both. State and local governments, representing about 15% of the economy, are beginning the worst contraction in postwar history amid a deficit of $166 billion for fiscal 2010, according to the Center on Budget and Policy Priorities, and a gap of $350 billion in fiscal 2011.
Households overburdened with historic levels of debt will also be saving more. The savings rate has already jumped to almost 7% of after-tax income from 0% in 2007, and it is still going up. Every dollar of saving comes out of consumption. Since consumer spending is the economy's main driver, we are going to have a weak consumer sector and many businesses simply won't have the means or the need to hire employees. After the 1990-91 recessions, consumers went out and bought houses, cars and other expensive goods. This time, the combination of a weak job picture and a severe credit crunch means that people won't be able to get the financing for big expenditures, and those who can borrow will be reluctant to do so. The paycheck has returned as the primary source of spending.
This process is nowhere near complete and, until it is, the economy will barely grow if it does at all, and it may well oscillate between sluggish growth and modest decline for the next several years until the rebalancing of excessive debt has been completed. Until then, the economy will be deprived of adequate profits and cash flow, and businesses will not start to hire nor race to make capital expenditures when they have vast idle capacity.
No wonder poll after poll shows a steady erosion of confidence in the stimulus.
So what kind of second-act stimulus should we look for? Something that might have a real multiplier effect, not a congressional wish list of pet programs. It is critical that the Obama administration not play politics with the issue. The time to get ready for a serious infrastructure program is now. It's a shame Washington didn't get it right the first time.
What's the Real CPI?
Inquiring minds are asking "What is the Real CPI?" It's a good question, too. However, you can find many widely differing opinions. For example, you will get one answer from the government, a different answer from sites like Shadowstats, and a third opinion from me.
First let's look at John Williams' Shadowstats .
That's an interesting chart, especially given the hyperinflationary bent of John Williams. He pegs the CPI at 2% as of May 2009 and had it at 9% mid-2008 and right around 5% in 2007. In contrast, the official CPI was 5.5% in mid-2008 and 2+% in 2007.
The problem will all of those numbers is they fail to properly take housing into consideration. And housing has been falling like a rock.
Should housing be in the CPI? How?
Bear in mind the government considers housing a capital good not a consumption item. Based on the idea that one would be renting a house if one did not own it, the government uses Owners Equivalent Rent (OER) and not housing prices in the CPI. OER is the largest component in the CPI.
By the same measure one might argue that lawn mowers and automobiles are capital goods. Lawn mowers are durable, not immediately consumed, and if one owns buildings and uses lawn mowers to maintain their properties (or if one hired someone to cut their lawns for them), the mowers would indeed be depreciated over time as a capital expense. The same logic also applies to auto leases.
Let's explore this from a practical standpoint starting with theory.
Consumer Price Theory and Practice
Here are a few excerpts of note from the Consumer Price Index Manual, Theory and Practice By Ralph Turvey.Page 47: The treatment of owner occupied housing is difficult and somewhat controversial. There may be no consensus on what is the best practice. The distinctive feature is that it requires the use of an extremely large fixed asset in the form of the dwelling itself.Watch what happens when the Case-Shiller Housing Index is substituted for OER in the CPI.
Page 147: The treatment of owner-occupied housing is arguably the most difficult issue faced by CPI-compilers. Equally important it may be difficult to identify a single principal purpose for the CPI.
In particular, the dual use of CPIs as both macroeconomic indicators and also for indexation purposes can lead to clear tensions in designing an appropriate treatment for owner-occupied housing costs.
Case Shiller CPI vs. CPI-U
The above chart is courtesy of my friend "TC".
CS-CPI fell at the fastest pace on record to measure at -6.2% year over year (YOY). Meanwhile the government’s CPI-U declined at the fastest rate since the 1950s at a -1.3% YOY pace.
The diverge is to due to the government’s housing metric of Owners’ Equivalent Rent (OER) continuing to show price increases (+2.1% YOY) vs. Case-Shiller data showing price decreases (-18.1% YOY). In fact, since the housing market peak in June 2006 OER is up +7.6%, while the Case-Shiller index is down -32.6%, an amazing 4020 basis point divergence!
CS-CPI Year over year has now fallen for 8 consecutive months and 11 of the past 15. High Year over year comparison data points for the next several months will likely result in CPI deflation coming in at -7% to -8% in the coming months.
Case Shiller CPI vs. Shadowstats
Whereas John Williams had the CPI at 9% in mid-2008, the official CPI was 5.5%, while Case-Shiller CPI had the CPI at +1%.
Which one fits events happening in the credit markets, stock market, and treasury market? The answer of course is CS-CPI.
A Practical Matter
From a consumer standpoint, what's more important, home prices dropping 25% to 50% in value over the course of a few years or the price of gasoline going from $2.00 a gallon to $4.00 a gallon over the course of those same few years?
From a macroeconomic standpoint, the correct answer to the above question is housing. People complain about gas prices when they rise because they buy gasoline every week. However, the destruction of housing wealth matters far more. Here is the question to ponder: How many tanks of gas will it take to equal the loss of $50,000 on a house?
Moreover, Fed interest rate setting is a macroeconomic event. The Fed should have been paying attention to housing prices but failed to do so. Finally, the treasury markets and consumer behavior are sure acting as if housing prices belong in the CPI.
By ignoring housing prices, CPI massively understated inflation for years and the CPI is massively overstating inflation now. Thus, as both theoretical and practical matters, Greenspan and Bernanke blew it by failing to take housing prices into consideration.
This is of course just another reason why we should not have a Fed at all. Greenspan micro-mismanaged interest rates to a ridiculously low level and Bernanke went along not understanding the problem. Now we are all paying the price for this Fed Folly.
Rosenberg: Investors Badly Want To Believe The Worst Is Over
Gluskin-Sheff analyst David Rosenberg offers some insightful and funny comments on yesterday's Meredith Whitney Rally:
We thought that the ability of one person to move the market went out three decades ago with Henry Kaufmann over at Salomon Bros., but Meredith Whitney did manage to do the same — in a bullish fashion, though — with her CNBC remarks on Goldman yesterday morning. (Although, it was interesting that Dell's reduced guidance for the current quarter garnered little attention.) What was interesting was how she stressed that this was not an industry-wide comment but rather specific to the firm and yet this was the tide that lifted all boats across the financials and the entire stock market for that matter. What this tells us is that even after 12 years of no appreciation in equities, and after brutal bear markets seven years apart, the public's resolve in the stock market has not been shaken. The fact that the equity market could rally this much based on one analyst's commentary is testament to the view of how badly investors want to believe that the recession and credit crunch are behind us and that unbridled prosperity lies ahead. As WTO Director-General Pascal Lamy said yesterday, "I would caution against excessive optimism."
You can sign up for Rosenberg's research notes here.
3 Cassandras Bare Ticking Time Bombs
Fed up with all the bad news? Me, too. But as the Boy Scouts tell us, be prepared. Makes sense to me, especially if it relates to what worries an awful lot of folks -- namely potential new risks on the economic and financial fronts. In this context, I thought I'd pass on what I've heard from a trio of incisive and dogged trackers of the economic and investment scene. In recent days, each has conjured up a scary scenario that could create a lot more economic mayhem, in turn igniting new waves of downward pressure on an increasingly shaky stock market.
Call them ticking time bombs waiting to explode, worrisome new threats that are largely being ignored and which not conspicuous on the radar screen. In effect, our trackers challenge the party line from Washington and Wall Street that the worst of the economic crisis is definitely behind us and they call attention to what they see as distinct economic dangers. What makes it especially worrisome is that a fair number of impressionable investors, for now at least, seem to be smitten with the idea that a solid economic rebound is on the way this fall that will rekindle the recent faltering 40% rally in the S&P 500.
What's more, they're backing up this view via a cash flight back into the stock market big time. Like fish captivated by dangling bait, these investors, though in the minority, have suddenly become much more risk prone. In the past five-and-a-half weeks, a for example, in a period of growing market fatigue, they've snapped up a shade under $10 billion worth of U.S. equity mutual funds, according to West Coast liquidity tracker TrimTabs Research. In other words, greed, despite the obvious danger, is beginning to creep back into the marketplace.
Not everyone, though, is comfortable with this renewed enthusiasm for stocks. Indicative of this, many wary investors -- setting temptation aside -- have paid little heed to the stock market rally. Over the past three months -- reflecting a fear of equities and a ravenous appetite for higher yield than the puny payouts offered by money market funds of well under 1% -- they've gone on a fixed-income buying spree, gobbling up about $30 billion a month in U.S. bond-oriented mutual funds.
Now to those scary scenarios, kicking off with J.C. Spender, an economics professor at Britain's Open University School of Business in Milton Keynes and a noted academic, who opts for a more cautious strategy. "Things could get very nasty," he says. "For two decades, the U.S. has had a consumer-driven economy. No more. Consumers are now on the ropes and they should remain there for several years, given the high rate of unemployment. So where will the recovery come from?" His view: For now, it's invisible.
Describing himself as a prisoner of collective pessimism and pointing to the disappearance of many jobs, the incredible amount of lost production and consumption and a staggering loss of construction, Spender fears unemployment could get progressively worse. "The numbers could be horrifying," he says. "We could see figures that we haven't seen since the Great Depression era of the 1930s." During that era, the jobless rate peaked at 25%, nearly three-fold the current 9.5% rate.
"Right now, things look awfully blue," Spender says. "I'm excited about the green shoots, but I don't see them. We're all hoping things will get better and that the worst is behind us. At the moment, though, that's solely hope and belief and there's nothing that bears it out." Spender also took a swipe at the Republicans, who, he argues, are "seeking to crush the economy and then say I told you so. They claim they're being patriotic, but they're currently displaying a deplorable lack of it."
A big Wall Street debate centers on those who worry about inflation and others who fear deflation. One well regarded investment mind, Bill Rhodes, the skipper of Boston-based Rhodes Analytics, which doles out market advice to institutional investors, points to another ticking bomb -- an outbreak of stagflation (a combination of declining or no economic growth and rising prices) which he expects will rear its head in the next two to three months.
In particular, he sees rising import prices (a reflection of a weakening greenback) creating additional economic stress for the lower income group, the people who are the chief buyers of such goods and who can least cope with these price hikes. Rising imports, he points out, also means the jobs of the people in this income bracket will become more precarious and their ability to buy such goods will be substantially reduced, leading to spending cutbacks.
His bottom line: a declining number of economic transactions, an unusual event in U.S. history, which will worsen the economic downturn. "If prices go up for imported goods and lower for domestic goods, we could begin to import inflation after exporting it for a very long time," Rhodes observes. About two months ago, Rhodes, citing a huge amount of liquidity on the sidelines, was bullish on the market. No more. Now, he believes, we're in a bear market rally.
One major problem, as he sees it: The credit markets will take longer than expected to recover, which means the economic recovery will be prolonged and the equity market will be damaged. Further, it's harder to fix credit market problems in a bearish market environment. Based on the latest economic data, Rhodes says "I suspect we're in for a selloff and we could test the March lows (6,547 in the Dow Industrials)." Such a test would send the Dow skidding about 24% from its current level of around 8,145.
Jeannette Schwarz, editor of the Option Queen newsletter and a member of COMEX (the Commodities Exchange), focuses on our third ticking bomb, which she regards as the biggest market risk. That's the declaration by the Asian countries that no one currency (notably the U.S dollar) should be the reserve currency. "If we lose our status as the reserve currency, the dollar, which supports our ballooning national debt, would lose value, thus setting the stage for a new inflationary spiral. And the market, in response, would suffer a great deal of pain."
At present, our national debt stands at $11.4 trillion. Or an average debt per person of $37,320. What about Uncle Sam's efforts, including the $787 billion stimulus package, to resolve our financial mess? "The government is acting irresponsibly," Schwarz says; "they're trying to put a Band-aid on an arterial bleed."
$1 Trillion Deficit Complicates Obama's Agenda
The U.S. federal budget deficit broke through the $1 trillion mark in June, potentially complicating the Obama administration's efforts to revive the economy and enact its longer-term policy agenda. The U.S. Treasury Department on Monday said the government's annual deficit reached almost $1.1 trillion by the end of June, a once-unthinkable level that could threaten any nascent economic recovery by undermining the dollar and driving up interest rates.
Surging deficits could also tie the administration's hands in responding to the economy's problems, by eroding support among voters and making Congress leery of adopting policies -- such as an overhaul of the health-care system -- that the administration believes are necessary for sustainable growth. It could be hard to win congressional approval for another round of fiscal stimulus, if that was seen as necessary, even as the economy continues to lag and the unemployment rate continues to rise, hitting 9.5% in June.
Some budget experts questioned whether lawmakers had the political will to take steps -- such as tax increases and spending cuts -- to help get the deficit under control. "Most anybody who's being honest knows we've reached a point where we've got a very dangerous fiscal situation, and it won't fix itself," said Maya MacGuineas, president of the nonpartisan Committee for a Responsible Federal Budget. She said the White House and Congress should negotiate a broad plan to reduce deficits now.
President Barack Obama on Monday stressed the importance of enacting health-care legislation as a way to bring down long-term deficits. A spokesman for the White House Office of Management and Budget, Kenneth Baer, termed health-care reform "the key to our fiscal future." But some budget watchdogs worry that Congress eventually could pass health-care legislation that relies on uncertain long-term savings, while substantially increasing short-term government expenditures.
The Obama administration in May estimated that the annual deficit would hit about $1.84 trillion by the end of the fiscal year, an increase from February's projection of $1.75 trillion. The administration also slightly revised upward its deficit estimates for 2010 and 2011, to $1.26 trillion and $929 billion, respectively. Slumping tax receipts, particularly from corporations and individual investors, have contributed substantially to the widening gap, as has rising spending on social safety-net programs, economic-stimulus measures and aid to auto and financial companies.
By historical standards, the 2009 deficit -- at 13% or more of the country's gross domestic product -- would be the U.S.'s biggest since the end of World War II in 1945, when it reached 21.5%. Some economists said the growing deficit hasn't had much impact on interest rates so far, despite a brief spike a few weeks ago. In part, that is because private-sector borrowing remains weak. Meanwhile, demand continues to be strong for the Treasury debt used to finance the government's deficit spending.
"The private-sector retrenchment is allowing the Treasury to raise a lot of funds at very low interest rates," said Jan Hatzius, chief U.S. economist for Goldman Sachs & Co. "There's a lot of demand" for federal debt. Some economists also say the 2009 deficit doesn't appear to be deepening as rapidly as once feared. Still, high deficit projections, along with rising unemployment rates, appear to be starting to hurt Mr. Obama politically. Some lawmakers from both parties are expressing concern about the potential tab for a health-care overhaul, which could cost the government up to $1 trillion over the next decade if spending isn't offset by tax increases and savings.
"This trillion-dollar deficit makes clear that our nation's fiscal situation is dire, yet Washington Democrats keep borrowing and spending money we don't have and forcing our children and grandchildren to foot the bill," House Minority Leader John Boehner said in a statement Monday. Some Democrats are also worried about the deficit, particularly the so-called Blue Dog moderates in the House. Rep. Charlie Melancon of Louisiana, the coalition's co-chairman, called for new budget restraints to be imposed on Congress.
"Our budget deficits didn't appear overnight and won't magically go away tomorrow," he said in a statement. "The Blue Dogs are working with the President and leadership in Congress to reinstate" pay-as-you-go rules that would require Congress to come up with budget cuts to offset many new programs.
Why creating jobs is so hard
by Bill Fleckenstein
An economy built on bubbles looks healthy until all that froth disappears, exposing the rotten framework. A structural repair is needed, and it won't be quick or easy.
Vice President Joe Biden recently acknowledged the administration's misreading of the weak economy. In view of his comments, I would like to update readers on my three-baseball-game analogy (introduced Nov. 3, 2008, in "Economy sinks as we save bankers") and note where we are now: Although we've managed to put the financial crisis behind us, the reality of the economic crisis is slowly becoming clearer to more and more people.
As an example of the fact that more people are starting to understand the root problem: The Financial Times recently carried an article by Pimco CEO Mohamed El-Erian titled "American jobs data are worse than we think" He notes that "there are rare occasions, such as today (July 2, when the June employment report was released), when we should think of the unemployment rate as much more than a lagging indicator; it has the potential to influence future economic behaviors and outlooks."
Of course, the reason we have such a problem creating jobs is because the country spent 10 to 12 years engulfed in financial bubbles. They created a vast misallocation of capital and gave the economy the appearance of health -- when all we were doing was creating more risk. Now we've got a broken economy and will experience serious difficulty creating real jobs. One of the shocking developments, El-Erian points out, is the speed with which jobs have been lost and how fast unemployment has screamed higher. He notes (in terms not far from what I've written): "The unemployment rate will increasingly disrupt an economy that, hitherto, has been influenced mainly by large-scale dislocations in the financial system."
That's El-Erian's way of saying: The big issue now is not the financial mess but the economic crisis. Slowly but surely, I think that as "green shoots" come and go without really yielding a lot, more folks will start to grasp that we have an enormous hole to dig ourselves out of. What landed us there was Federal Reserve money printing, which created the bubbles -- aided and abetted by greed on Wall Street and Main Street, and by authorities' abdication of responsibility. All of that allowed us to experience a decade-plus of bubblenomics. Until folks fully process those facts, I believe that they will find it virtually impossible to navigate this post-bubble period.
The vice president says the administration misread the economy and hints at a possible second stimulus. Is it time to consider it? At some point, the economic crisis may feed back into the financial system, creating another financial crisis as we discover that the stress tests done on banks were way too lenient and that some financial institutions are back on the disabled list. Ultimately, we will endure the real nightmare of the funding crisis, the third part of my three-baseball-game analogy. Thus far, the risk of a dollar meltdown from all the Fed's money printing doesn't seem to have attracted much attention outside the occasional maneuver by China (to express its concerns about the dollar, to ever-so-slightly rejigger the rules for settling trades in renminbi or to set up currency swaps).
Though it may be quite a ways off, higher interest rates caused by both our own massive borrowing needs and a weak currency will not be "fixed" via stimulation. Once we get to that point, only austerity and intelligent policies will extricate the country from that quagmire. The one bright spot? In that environment, the financially prudent may actually get a fair return for saving money.
Obama: Unemployment Likely To Keep Ticking Up
President Barack Obama on Tuesday declined to predict how high unemployment will climb but made clear he expects it to keep worsening for a while as hiring lags behind other signs of economic recovery. "How employment numbers are going to respond is not year clear," the president said on a day when he was headed to Michigan, home of a particularly battered economy. "My expectation is that we will probably continue to see unemployment tick up for several months."
The unemployment rate stands at 9.5 percent, the highest in 26 years. Obama, addressing reporters in the Oval Office, said the stabilization of the financial markets has allowed banks to start lending again and some small businesses to stay afloat. But he said his administration is aware that the most important factor is whether people are able to get good-paying jobs. More than 2 million jobs have been lost since Congress passed Obama's $787 billion economic stimulus package. Without that government intervention, Obama said, states like Michigan would be even worse shape because they would have had to lay off more teachers, firefighters and other workers.
The White House has been criticized for being overly rosy about employment projections. Just 10 days before taking office, Obama's top economic advisers released a report predicting unemployment would remain at 8 percent or below through this year if an economic stimulus plan won congressional approval. Instead, it is headed toward double digits. The president said the creation of jobs that pay good wages is the "single biggest challenge" in the recovery for the U.S. and governments worldwide. He defended his multi-pronged agenda of trying to revamp health care, energy, science innovation and infrastructure as the key to real economic growth.
"Those foundations are so critical because we've got to find new models of economic growth," Obama said. Obama was headed later to Michigan to promote investments in community colleges. The state's unemployment rate is the nation's highest, 14.1 percent. The president spoke after a wide-ranging meeting with Dutch Prime Minister Jan Peter Balkenende.
Obama mulls rental option for some homeowners
U.S. government officials are weighing a plan that would let borrowers who have fallen behind on their mortgage payments avoid eviction by renting their homes instead, sources familiar with the administration's thinking said on Tuesday. Under one idea being discussed, delinquent homeowners would surrender ownership of their homes but would continue to live in the property for several years, the sources told Reuters.
Officials are also considering whether the government should make mortgage payments on behalf of borrowers who cannot keep up with their home loans, tapping an unused portion of a $50 billion housing aid kitty. As part of this plan, jobless borrowers might receive a housing stipend along with regular unemployment benefits, the sources said.
Bernanke Sees Possibility Of 'Jobless' Recovery
Federal Reserve Chairman Ben Bernanke sees the possibility of continued high unemployment even after the recession eases, a key Republican lawmaker who met with the Fed chief told CNBC. "It was a rather sobering meeting," Sen. Richard Shelby, an Alabama Republican, said in a live interview. "I said...'Could this be a jobless recovery?'...and he said it could be," Shelby said.
Bernanke has predicted the recession will end this year, with many economists forecasting that the economy will start to grow again as soon as the current July-September quarter. But Bernanke's comment that unemployment could remain high for some time appeared to be more pessimistic than any of his recent public statements. "I didn't come out of the meeting feeling a lot of euphoria," Shelby said.
Earlier Monday, Christina Romer, chair of the President's Council of Economic Advisors, told CNBC that it was difficult to quantify job creation despite President Obama's prediction that his economic stimulus plan could save or create 3.5 million jobs. "It's very hard to say exactly—you don't know what the baseline is," Romer said in a live interview. "Because you don't know what the economy would have done without it. (the stimulus plan)."
The president's council released a report on Monday saying that jobs in the healthcare and environmental sectors are growing at a faster rate than those of the U.S. economy as a whole.
The report, which looks at how the U.S. labor market is expected to develop in the next few years, says a rebound in employment in construction and some manufacturing sectors is expected as stimulus spending approved early this year invests in projects around the country. The report is based on an analysis of recent labor market data, a White House official said. The report identifies likely changes in the U.S. labor market as economic drivers shift from sectors like financial services to the growing sectors that are transforming the economy, the official said.
The 10 Worst US Cities To Be Homeless
Laws criminalizing basic human functions like eating, sleeping or sitting in public places are increasingly cropping up across the country even as homelessness is on the rise, according to a report released Tuesday by advocates for the homeless.
"We are in the midst of a growing human rights crisis right here in the United States," said Maria Foscarinis, executive director of the National Law Center on Homelessness and Poverty, which released the report in collaboration with the National Coalition for the Homeless.
The report singles out specific areas with a top ten list of the "Meanest Cities." Los Angeles was named the meanest city in the U.S., primarily for its aggressive policing of homeless folks on Skid Row (and also for restrictions on sitting or laying on sidewalks). The runners up for inhospitality to the indigent are St. Petersburg, Fla. and Orlando, Fla., where the city council actuality made it a crime to share food with homeless people in parks -- and a person was actually arrested for doing so. (A federal court found the law unconstitutional and the city is appealing.)
Municipal meanness is increasing nationwide, said the report's authors during a conference call with reporters. Tulin Ozdeger of the NLCHP cited a 7 percent increase in laws prohibiting "camping," an 11 percent increase in laws prohibiting loitering, a 6 percent increase in laws prohibiting begging, and a 5 percent increase in laws prohibiting aggressive panhandling in the 224 cities surveyed both in this report and its 2006 predecessor.
Laws prohibiting camping are aimed at tent cities, like the one Sacramento, Calif., that earlier this year spawned a national fuss, even though pitching tents has been a basic human response to homelessness for as long as tents have existed. In places like Olympia, Wash., and Portland, Ore., impromptu tent cities have grown into city-sanctioned movements.
The Department of Housing and Urban Development reported last week that while the number of homeless individuals seeking shelter remained constant for 2008, the number of families seeking shelter increased 9 percent from 2007. As Ozdeger, Foscarinis and the National Coalition for the Homeless director Michael Stoops point out, the latest data are a year old and don't reflect the latest trends in worsening unemployment and foreclosure rates.
The 191-page report praises some cities' initiatives to address issues surrounding homelessness, such as donation meters that allow people to give (without supporting panhandling) and efforts to provide permanent supportive housing. Measures that criminalize behavior associated with homelessness, the study notes, often run afoul of the Constitution.
Here's the top ten meanest cities:1. Los Angeles, CA
2. St. Petersburg. FL
3. Orlando, FL
4. Atlanta, GA
5. Gainesville, FL
7. San Francisco
The report, titled "Homes Not Handcuffs: The Criminalization of Homelessness in U.S. Cities," is available from the Coalition's website (PDF).
Spitzer Says Banks Made 'Bloody Fortune' on U.S. Aid
Eliot Spitzer, the former New York governor and attorney general, said U.S. banks made a “bloody fortune” while receiving taxpayer money without a proven benefit to the wider economy. Politicians understand the “populist rage” with excesses in the financial industry and in this case the “public is right,” Spitzer said in a Bloomberg Television interview today. “We have saved financial services, we have not created a single job. We are still bleeding jobs.”
As New York attorney general, Spitzer was known as “the sheriff of Wall Street.” He changed business practices and collected billions of dollars in settlements from financial corporations such as Merrill Lynch & Co., American International Group Inc. and Marsh & McLennan Cos. He later became governor, resigning in March 2008 after he was identified as a client of the Emperors Club VIP, a high-priced prostitution ring. Spitzer said rules proposed by President Barack Obama’s administration are irrelevant because agencies failed to enforce existing regulations.
“Regulatory agencies already had the power to do everything they needed to do,” he said. “They just affirmatively chose not to do it.” “You don’t need new regs to do it, you just need the will to do what they were supposed to do,” he said. Former Federal Reserve Chairman Alan Greenspan had “avowed a theory of hands off” and didn’t consider himself a regulator, Spitzer said. “What we’re seeing now is a new regulatory spirit,” he said. Spitzer said the lessons of the financial crisis will only be remembered over a short period of time. “Over and over we fall into the same trap,” he said. “Ten years from now we will have forgotten.”
Governors of states like California, where the government is in a deadlock over a $26 billion budget deficit, are ’’intensely unpopular right now because they’re working for an impossible situation,’’ Spitzer said. New Jersey Governor Jon Corzine, who Spitzer said is also in an “impossible position,” has an all-time high disapproval rating of 60 percent of registered voters four months before Election Day, according to a Quinnipiac University poll. In June, Corzine signed a $29 billion budget that raises taxes on the wealthy and implements worker furloughs and wage freezes. Spitzer, 50, is director of Spitzer Enterprises LLC, his family’s real estate business. “I missed the opportunity to contribute right now,” Spitzer said.
U.S. Justice Department investigates Credit Derivatives market
Markit Ltd, a dealer-owned provider of prices in the credit default swap market, said on Tuesday the U.S. Justice Department is investigating the $26.5 trillion market. "Markit has been informed of an investigation by the Department of Justice into the credit derivatives and related markets," the company said in a statement, but it did not specify the targets of the investigation.
"Markit strives to enhance the transparency and efficiency in the credit derivatives market by making all our independent data products commercially available to all market participants," the statement added. The Justice Department's Antitrust Division this month sent civil investigative demands to some large dealers in the CDS market, seeking detailed information about their CDS exposures and their relationship to Markit, said people familiar with the letters.
The Justice Department is thought to be looking into whether dealers that have an equity stake in Markit have any unfair advantage over other market participants relating to CDS price information, analysts said. CDSs are privately traded contracts used to insure against a borrower defaulting on debt or to speculate on their credit quality. Markit, which describes itself on its Website as "the benchmark for CDS pricing data," collates CDS prices from dealers, and disseminates intraday and end-of-day prices to subscribers of the service. Some end-of-day prices are also made available on the company's Website for free.
Thomson Reuters buys and disseminates Markit's CDS prices. JPMorgan is the largest single holder of Markit's shares, according to an annual return filed on U.K. Companies House in May this year. Other banks with large share holdings include Bank of America, Goldman Sachs, Royal Bank of Scotland Group, Citigroup, UBS and HSBC Bank, the filing shows. Markit owns the benchmark credit derivative indexes in the United States and Europe.
The company was also a driving force behind recent changes to standardize CDSs contracts, which were overhauled in a bid to make them easier to enter into central clearinghouses.
Central clearing of CDSs is a key plank of the Obama administration's efforts to remove risks and enhance transparency in the market. The government is also encouraging some CDS contracts to be traded on exchanges or other electronic platforms, a move that threatens to reduce the margins banks charge for trades.
"I do see an evolution toward electronic trading of these products on an exchange-like platform, and this could be another step in that evolution," said Chris Allan, analyst at broker-dealer Pali Capital in New York. This "has always been a sticky point for the dealers. The more transparency you have out there the tighter the spreads become," he said. Critics say that the lack of transparency in the unregulated market also makes it ripe for manipulation.
Regulators have been probing the CDS market for evidence of potential price manipulation, which they believe could have enhanced worries about financial companies and contributed to the failure of companies including Lehman Brothers. The U.S. Securities and Exchange Commission last year sent subpoenas to interdealer credit derivative brokers relating to the trading of CDSs on financial companies in September 2008. The move followed a request from New York Attorney General Andrew Cuomo that also related to the trading of financial CDS in September, the month that Lehman failed.
U.S. Debates Fate of CIT, a Small-Business Lender
The CIT Group is one of the nation’s biggest lenders to small businesses. But a debate is swirling in Washington over whether it is large enough — or important enough — to save. Regulators and company officials on Monday grappled with whether the New York-based lender should receive more government help, or whether the 101-year-old company, which has already received a $2.33 billion taxpayer lifeline, should be left to go it alone, even if that means its demise.
At its heart, the debate is really about whether the administration will draw a line in the sand on banks considered too big to fail, and where any line should lie. Since allowing Lehman Brothers to collapse last summer, federal regulators have been propping up many banks and financial institutions. The fear was that if more big players tumbled, the entire financial system would be at risk.
CIT, however, could be the litmus test in that debate. While not small — with $75 billion in assets it is the nation’s 26th-largest bank holding company — CIT is a small fraction of the size of Lehman or Washington Mutual, which had $639 billion and $309 billion in assets, respectively, when they failed last fall. Administration officials say they do not believe the failure of CIT would pose systemic risks, as the collapse of such institutions as Bear Stearns, Citibank and Bank of America would.
CIT and government officials on Monday explored the possibility of federal assistance to the beleaguered company, but had made no decision by early evening. The situation was described as fluid, and the government could still decide to provide aid, said administration officials briefed on the situation. The outcome could affect hundreds of thousands of small- and midsize businesses across the country that depend on CIT for access to loans to run their businesses.
Unlike retail banks, which are largely financed by customer deposits, CIT raises money in the capital markets to lend. When the credit crisis hit, CIT was hobbled, and sharply reduced the credit it offered. A decision to allow the company to file for bankruptcy would create a potentially awkward situation for the Obama administration. In December, at the height of the crisis, the Treasury Department rushed through an application by CIT to become a bank holding company and flooded it with billions of taxpayer dollars through the federal Troubled Asset Relief Program.
Then there is the issue of appearances if the administration allows a lender that services smaller companies to collapse, after stepping in to provide multiple lifelines to Citigroup, Bank of America and other troubled large financial institutions considered too important to let die. “You’d have an issue of the first firm that they would make an example out of by allowing to fail is one that fills a niche and helps the little guy out,” said Vincent R. Reinhart, a former Federal Reserve official who is now a resident scholar at the American Enterprise Institute. At this point in the recession, small- and midsize businesses need access to critical funds as well, he said.
Treasury Secretary Timothy F. Geithner said Monday in London that it was in the government’s interest to ensure stability in the financial system. “I’m actually pretty confident in that context we have the authority and the ability to make sensible choices,” Mr. Geithner said in response to a question at a news conference. “We have a significant interest generally in trying to make sure the financial system gets through this, adjusts where it needs to adjust and emerges stronger.”
But investors interpreted Mr. Geithner’s comments as suggesting that the government might not be inclined to help. Still, in a sign of how resilient the financial system has become since credit markets started working again, the broad stock market rose, as did shares of other financial firms, even as CIT’s stock fell 12 percent, to $1.35. Moody’s Investor Service and Standard & Poor’s slashed CIT’s credit ratings on Monday.
For much of the last century, CIT engaged in the meat-and-potatoes business of providing loans and leases for heavy machinery, technology equipment and other staples of the manufacturing economy. But under its current chief executive, Jeffrey M. Peek, a well-liked Wall Street veteran who lost out several years ago in a race to run Merrill Lynch, CIT made an ill-timed expansion into subprime mortgage and student lending.
Those two moves — carried out at nearly the top of the frothy markets before they collapsed — led to great losses beginning in 2007. CIT has $59 billion of long-term debt, including $10 billion that matures in the next year. The company has also remained severely strained during the credit crisis. While it is registered as a bank holding company and has about $3 billion in deposits in a Utah-based bank, CIT has historically relied on bonds and its ability to tap into the short-term debt market for the money it lends to other companies. It has been trying to raise more money through its bank.
And while the Federal Reserve has been extending credit directly to securities firms to stabilize the capital markets since last fall, commercial lenders like CIT are not permitted to borrow from the Fed. In a statement on Sunday evening, CIT said it was also pursing the possibility of obtaining assistance from the Federal Deposit Insurance Corporation through a program that has allowed Goldman Sachs and other banks to issue their debt cheaply with the backing of the agency.
CIT has applied for access to the program, which provided guarantees for about $334 billion in loans as of July 9. But Sheila C. Bair, the chairwoman of the F.D.I.C., does not view the program as a bailout solution for banks and financial institutions, according to a government official briefed on the situation. Ms. Bair has said repeatedly that she views the program a tool for providing liquidity only to healthy banks.
Perhaps more important, the program, which was set to expire this month but was recently extended until October, has plenty of other midsize banks that may need to tap it, said Kathleen Shanley, an analyst with GimmeCredit. “The government still has limited resources,” Ms. Shanley said. “Now that a certain level of stability has been restored to the market, it may be time to signal that we can’t support everyone all of the time.”
Goldman Sachs profits hailed by lawmakers
Democrats and Republicans alike lauded Goldman Sachs on Tuesday after the company, which received taxpayer assistance last year, said its quarterly profit rose and that it was setting aside billions for employees. "Is there a law in the United States that you can't make profits?" Representative Paul Kanjorski, a senior Democrat on the House Financial Services Committee, asked reporters.
Kanjorski said he hoped Goldman's profits were a sign of economic recovery and a possible bellwether for other sectors. "I have great hope General Motors has great profits next year," he said. Last month, Goldman repaid the $10 billion that it received from the U.S. Treasury Department in October. In so doing, Goldman freed itself from government-imposed restrictions on executive pay.
The bank said its second quarter earnings rose 33 percent to $2.7 billion, and that it had put aside $6.65 billion for salaries, bonuses and benefits in the quarter, up by nearly half from a year ago. "I want all the people we gave money to make profits. Pay the money back with interest and have a net zero cost to our program," said House Democratic Leader Steny Hoyer. The top Democrat in the Senate, Majority Leader Harry Reid, was restrained.
"I'm not in this statement criticizing Goldman Sachs because I don't know how they made their money," Reid told reporters. "But I'm glad, as I indicated, someone made some money." Richard Shelby, the top Republican on the Senate Banking Committee, said, "I'm not surprised. Goldman Sachs has a history of being well run and sometimes ahead of the others."
There was no jubilation from the White House, however. "I don't know if the president has seen any of the information and I'm hesitant, as I think the Treasury is, to comment on individual earnings reports," White House spokesman Robert Gibbs told reporters aboard Air Force One.
Goldman Sachs First-Half Compensation Climbs to $11.4 Billion
Goldman Sachs Group Inc. set aside $11.4 billion for compensation and benefits in the first half of 2009, up 33 percent from a year earlier and enough to pay each employee $386,429 for the period.
The compensation figures were released today with the firm’s record second-quarter earnings results. Revenue jumped 31 percent to $23.19 billion in the first half and the firm set aside 49 percent to cover its largest expense, compensation and benefits. The number of employees fell to 29,400 from 29,800 at the end of March, New York-based Goldman Sachs said today.
After setting a Wall Street profit and pay record in 2007, Goldman Sachs cut compensation 46 percent last year as the financial crisis slashed revenue and the firm accepted government support. The firm repaid $10 billion to the U.S. Treasury last month, freeing itself from restrictions on year- end bonuses. Even so, a compensation bonanza at a company that received taxpayer support could stoke political anger with the U.S. economy in recession.
“The question becomes how does this all play politically? This could be a political explosion,” said Eliot Spitzer, the former governor of New York, in an interview before the results were released. The general public may think “suddenly they’re back making their bonuses and we’re unemployed. And you know what? The public is right.”
In the first six months of fiscal 2008, Goldman Sachs set aside $8.52 billion, or an average of $270,614 per employee. Guy Moszkowski, an analyst at Bank of America Corp. in New York, estimated last week that Goldman Sachs’s compensation may jump 64 percent from 2008 to $17.9 billion this year, which is still below the record $20.2 billion in 2007. He also predicted that the firm may beat its record by paying employees $20.36 billion in 2010.
Chief Executive Officer Lloyd Blankfein, who agreed not to take a bonus last year after being awarded a record-setting $68.5 million in salary and bonus for 2007, said in an April speech that the industry’s compensation decisions before the crisis “look greedy and self-serving in hindsight.” “I wouldn’t be surprised if there’s some sort of a backlash,” said William Fitzpatrick, an equity analyst at Optique Capital Management, which manages $900 million, including Goldman shares, in Racine, Wisconsin. “But if you’re Goldman, you’re in good shape here in the sense that there’s not a whole lot they can do to enforce any sort of compensation restrictions.”
At Goldman Sachs’s annual shareholder meeting in May, Blankfein, 54, read a three-page statement outlining the company’s “compensation principles.” They include avoiding multiyear guarantees, increasing the restricted stock portion of pay as an employee’s compensation increases, and ensuring that pay isn’t linked solely to individual risk-taking.
A month later, U.S. Treasury Secretary Timothy Geithner also proposed a set of “broad-based principles” for the industry that try to align pay with sound risk management and long-term growth. “We are not capping pay,” Geithner said in his June 10 statement. “We are not setting forth precise prescriptions for how companies should set compensation, which can often be counterproductive.”
Goldman, J.P. Morgan Chart a Course for Pullback
Financial stocks set the tone Monday in a week expected to be dominated by the quarterly reports of banking giants, though chart watchers warn some of the best in the sector may be overextending themselves.
With Goldman Sachs Group and J.P. Morgan Chase set to post earnings reports in the next few sessions, banking stocks were at the heart of the market's move higher Monday. Overall, the Financial Select Sector SPDR Fund rose 6.4% on the day, with Goldman up 5.3% and J.P. Morgan up 7.3%.
Setting up the gains, financial analyst Meredith Whitney said Goldman Sachs will benefit from being a key player in a "tsunami of debt issuance" by governments in an upgrade of Goldman to "buy." Ms. Whitney, of Meredith Whitney Advisory Group, predicted that Goldman Sachs would post second-quarter results Tuesday above Wall Street estimates and set her 12-month price target on Goldman shares at $186. But even if Ms. Whitney is dead-on, the market has already reflected Goldman's status as the bank of choice. Goldman has outperformed the broader market and all financials for almost a year now. While most banks touched new multiyear lows in March, for example, Goldman hit a low in November and didn't retest that level in March.
Taking a step back to look at Goldman before the market collapse, Cleve Rueckert, a technical analyst with Birinyi Associates, notes that the firm traded between $160 and $200 for much of 2008. And, as Goldman has surged higher and pushed above its 50-day moving average and near its 200-day moving average, the low end of that range should set up as strong resistance, he said. "If it got back up to $160, you'd see some of those people holding the stock for a long time start to get out," Mr. Rueckert said. "People are more inclined to take profits than to buy something that's up quite so much."
As for J.P. Morgan, which reports results on Thursday, the New York financial-services giant hasn't had the same long, sustained rally as Goldman, but has more than doubled since bottoming on March 6. By comparison, the Financial Select Sector SPDR is up more than 90% in the same time period. Mr. Rueckert warns that such a solid stock-price gain in a short period of time would need a significant spark to bring forth more gains. On a technical level, there just isn't anything to suggest the rapid gains can go on forever.
Quarterly reports are one potential catalyst for Goldman, J.P. Morgan and the broader banking sector. Should both Goldman and J.P. Morgan provide solid quarterly profits, Mr. Rueckert said he wouldn't be surprised to see a broader follow-through in financials, possibly even helped by some of the laggards. But it is notable that as bullish as Ms. Whitney is about Goldman, she is exceedingly bearish on the U.S. economy and other U.S. financial companies. While a sluggish financial sector could provide an opportunity to increase market share for some of the better performers, it is hard to see how a struggling economy would help any bank's bottom line.
Bank of Goldman
by Matthew Goldstein
Lloyd Blankfein, chief executive officer of Goldman Sachs and banker-in-chief of the US/world, didn’t disappoint as his investment firm once again proved that it’s second to none on Wall Street when it comes to printing money and profits. By now you know the headline news that Goldman generated blowout second-quarter earnings on record net revenues of $13.8 billion. Net revenues from trading and principal investments were $10.78 billion, up 93% from the year ago period. Remember that trading code theft case with Sergey Aleynikov? No worries here.
The firm exceeded even the most widely optimistic analyst forecasts and demonstrated that the financial crisis, which pushed Goldman’s stock down to $51 last November is a distant memory–for Goldman at least. BTW, Goldman’s stock is now trading around $150. Talk about stock appreciation. And it looks like maybe Goldman will be able to pay those fat year-end bonuses afterall. In the quarter, compensation and benefits expenses were $6.65 billion. That amount is higher than the second-quarter of 2008 because of higher net revenues. Fatter Goldman bonsues will make all those luxury real estate brokers in Manhattan happy. But while everyone is singing Goldman’s praises, let me point out a few blemishes–albeit small ones.
First, Goldman continues to do investors no favor by failing to publish a detailed financial supplement along with its earnings release (something every other big bank does) to help decipher its quarterly numbers.
Second, Level 3 assets–assets that the firm can’t value and trade–remain stubbornly high at $54 billion. Sure, the dollar value of Level 3 assets is down by $5 billion from the first quarter. But these impossible-to-value assets (some of them toxic) represent 6.1% of Goldman’s total assets.
Third, the risk Goldman is taking in its trading operation continues to edge up. The average daily VaR, or value at risk, was $245 million as of June 26. That’s up from $240 million in the first quarter and up from $184 million as of May 2008. Goldman keeps piling on risk to drive its trading gains.
Fourth, the firm says a good chunk of its 28% year-over-year gain in net revenues from stock trading came from “significantly higher net revenues in derivatives.” Goldman, since its conversion to a bank holding company last year, now ranks second among US banks in total notional value of derivatives contracts. More and more, counterparty risk is getting concentrated in Goldman–now that Lehman and Bear Stearns are gone.
Fifth, as I argued last week, Goldman needs to start providing a more detailed account of just where all those trading dollars come from. The following explanation for the $6.8 billion in trading revenue it churned out in fixed income, currencies and commodities doesn’t cut it:“These results refelected particularly strong performances in credit products, interest rate products and currencies, reflecting strength in the client franchise.” Well, duh.
Sixth, the news that the firm posted strong FICC trading numbers, even after taking a $700 million loss on commercial mortgage loans is not necessarily troubling for Goldman. But it is a troubling sign for other banks that don’t Goldman’s secret sauce for generating outsized trading gains.
Ilargi: Interesting. John Carney at BusinessInsider, but also very wrong. Goldman's excess capital will be utilized for take-overs. It's a war chest.
Goldman: Here's Why We're Still Hoarding Our Capital
Goldman Sachs has a remarkably high capital ratio, with far more cash than it needs to pay off any debt maturities coming due or meet any regulatory capital requirements on the books. So what is Goldman planning to do with its $172 billion of excess capital? It's planning on hanging on to it. On the earnings call going on right now Goldman explained why it isn't more actively deploying its capital in the markets.
- Sellers still have unrealistically high prices. Although we've been hearing for over a year that this is the buying opportunity of a lifetime for distressed debt, Goldman has mainly focused on buying plain-vanilla triple As and government securities. It says it would like to buy up some riskier paper, but the sellers are still demanding price levels that Goldman thinks don't make sense.
- Government might raise capital levels, so we'd better hold on to cash. The plans to reform the regulation of the security sector have created an uncertainty about what the new capital rules may be. To prepare for more stringent capital requirements, Goldman is holding on to excess capital.
- "We're way far away from out of the woods." The world is still a scary place, with markets and economies still on the rocks. Goldman wants to keep up its liquidity just in case things stay ugly or get uglier.
In short, Goldman Sachs is just like the rest of us. It's saving up for rainy days ahead and it still thinks sellers are charging too much for their crappy assets.
Bloodshed In Goldman's Commercial Mortgage Portfolio Continues
It's not all good news coming out of Goldman Sachs. The losses from Goldman's commercial mortgage portfolio kept mounting last quarter, amoung to a loss of $700 million, according to the firm's earnings release today. Goldman held around $8 billion in commercial mortgages and commercial mortgage backed securities at the end of last year. The firm lost around $800 million on that portfolio in the last quarter, a huge 10% decline. This quarter things slowed a bit, with that commercial mortgage portfolio losing almost the same share of its value, declining by an additional 9.7% or $700 million.
Of course, some of this is guess work. Goldman is notoriously unforthcoming about exactly what it holds and how it is calculating the values of those assets. We don't know the current size of the mortgage portfolio. If the firm sold off a lot of commercial mortgages since the start of the year, the decline in the retained portion might be even great than estimated. This loss comes after Goldman's CFO had stated that he thought losses in the commercial mortgage sector would be far more limited than those in the residential mortgage sector because the underlying property was more valuable. Unfortunately, as consumer spending remains punishingly frugal, the underlying value of commercial properties is declining as well.
Is Bailing Out California Necessary To Preserve The Union?
Marshall Auerbuck at New Deal2.0, a blog for the Franklin and Eleanor Roosevelt Institute (just so you know where they stand), sees dramatic consequences if California is allowed to continue printing IOUs and then use them to collect taxes.
According to the San Diego Union-Tribune, Republicans and Democrats alike embraced legislation last Friday that would make California IOUs legal tender for all taxes, fees and other payments owed to the state - an action that effectively would mean that California is entering the currency business . . .
While it might appear that the new law seems merely to allow California to deficit spend just like the Federal Government - in actuality, the effect is far more profound than that. Allowing the IOUs to be an acceptable payment method for state taxes, instantly imparts value to them - in effect, what you have is a state creating a sovereign currency right under the noses of the Treasury. They are stumbling their way into it, and as they do so, some of the true nature of contemporary money is being revealed. It will be viewed as a stop gap measure at first, and then could very well become entrenched as states realize they have a way to escape balanced budget requirements.
It will be interesting to see what the exchange rate is between California IOU and US currency - the IOUs do offer a yield, so should be less than par by design. I wonder if NY is next.
This is like some sort of return to the 13 colonies with all kinds of ersatz currency floating about. It’s hard to believe the Rubinite wing of the Democrats will just let it be, given the threat it represents to Wall Street’s prevailing economic interests, but it is an understandable response to a federal government which continues to champion the interests of the rentier class above the vast majority of Americans by emphasising “fiscal sustainability” and destroying aggregate demand in the process.
Now obviously this is hardcore Keynesian stuff -- putting "fiscal sustainability" in scare quotes, while claiming that government inaction is "destroying aggregate demand."
Basically, he's warning Obama: Forget this fiscal sustainability crap, if you don't bail out California, you risk ending the union. Do what Lincoln did, and keep the union together.
The problem with this line of thought -- which isn't totally ridiculous; we've said it ourselves that California is creating its own currency -- is that the state still needs to borrow and pay off its debt in dollars, which means there's an inherent limit on its ability to function solely with Arnie-bucks. It can accept them as taxes, but it can't pay muni holders with them.
Here's a thought experiment. Imagine a bomb landed on the rest of the world besides California, and all its debtholders were dead, so it could just tear up its obligations. That would obviously solve the debt problem. Also, since there wouldn't be a Federal Reserve or a Treasury, it would have to use Arnie-bucks, since there'd be no US currency issuer.
Would that solve its problems? Obviously not. You'd still have the fact that the state grew unsustainably, using too much of its resources for sprawl and other services, not to mention the toxic political atmosphere.
In situations like this, it can be useful to ignore money, which is a distraction. They can print and create IOUs all they want, but none address any of the fundamental problems with the state. Were Washington to bail out the state it would reasonably demand all kinds of concessions -- if for no other reason than to make an example for other states, so that they don't follow suit. Of course, that creates all kinds of fresh constitutional issues.
One cool thing: We're living history. The idea that we're talking about the dissolution of the union -- extremely remote -- is pretty interesting.
After the storm comes a hard climb
by Martin Wolf
Is the world economy on its way out of the crisis? Has the world been learning the right lessons? The answer to both questions is: up to a point. We have done some of the right things and learnt some of the right lessons. But we have neither done enough nor learnt enough. Recovery will be slow and painful, with substantial danger of relapses. Start, however, with the good news. The financial crisis, narrowly defined, is over: stock markets have rallied; liquidity is returning to markets; banks have been able to raise equity; and the extreme risk spreads in financial markets of last year have disappeared. When addressed powerfully, panics end. In this case, the commitment of the authorities to the rescue of a failing financial system was unprecedented. It has had the desired results.
The worst of the economic crisis is also passing. As the Organisation for Economic Co-operation and Development noted in its latest Economic Outlook, “for the first time since June 2007, the projections...have been revised up for the OECD area as a whole compared with the previous issue”. Similarly, the International Monetary Fund states in its latest World Economic Outlook update that “economic growth during 2009-10 is now projected to be about half a percentage point higher than forecast by the IMF in April, reaching 2.5 per cent in 2010”.
Such a turning point in forecasts is an indicator of pending recovery. It emerges clearly in the successive monthly consensus of forecasts for 2010. Improvements in these forecasts can be seen for the US, Japan and the UK, though, worryingly, not for the eurozone (see chart). China’s forecasts show great resilience. Confidence in India is also rising. Yet we must put this news, welcome though it is, in context. The worst of the financial crisis may be behind us, but the financial system remains undercapitalised and weighed down with an as yet unknown burden of doubtful assets. It is also far from a truly “private” financial system. On the contrary, it is underpinned by massive explicit and implicit taxpayer support. The probability of mischief down the road is close to 100 per cent. But the current hope is that the road to any such mischief goes via a recovery.
Equally, the expected economic “recovery” is not going to feel like much of one. The latest consensus forecasts for growth in the high-income countries for 2010 are well below potential. Yet this is also at a time when the admittedly uncertain estimates of “output gaps” (or excess capacity) are at extreme levels. For 2009 the OECD estimates these at 4.9 per cent of potential gross domestic product in the US, 5.4 per cent in the UK, 5.5 per cent in the eurozone and 6.1 per cent in Japan.
Given the forecasts for modest growth, excess capacity will be greater at the end of 2010 than at the end of 2009. The risks to inflation – or rather risks of deflation – are self-evident. So are the chances of further jumps in unemployment. In keeping with this, the “breakeven rate” of inflation implied by inflation-indexed and conventional US treasury bonds has fallen again, to close to 1.5 per cent. June’s hysteria over rising yields on conventional bonds looks absurd.
Behind the excess capacity and the massive increases in fiscal deficits is the disappearance of the high-spending consumer, above all from the US. This is suggested by the huge shifts in the balance between private sector incomes and spending implied by OECD forecasts for current account and fiscal balances. In 2007, the US private sector spent 2.4 per cent of GDP more than income. In 2009, suggests the OECD, it will be spending 7.9 per cent of GDP less than income.
This massive shift into prudence – long called for by critics and so little appreciated now it has come – largely explains the shift into fiscal deficits: between 2007 and 2009, a 10.3 per cent of GDP shift in the private sector’s balance between income and spending was offset by a 7.3 per cent of GDP fiscal worsening and a 3 per cent of GDP improvement in the current account deficit (see chart). Even as it is, this fiscal offset has not prevented a deep recession.
Private sector prudence is likely to endure in a post-bubble world characterised by mountains of debt. In the last quarter of 2008 and the first quarter of 2009, US household borrowing was modestly negative. But at the end of the first quarter of 2009 the ratio of gross household debt to GDP was a mere 2 per cent of GDP lower than at the end of 2007. De-leveraging is a painful process: it has barely begun. If, as is likely, the private sector remains prudent, the public sector will remain profligate. Moreover, so long as this period of retrenchment lasts, the risk will not be inflation, but rather deflation. The lesson from Japan is that fiscal profligacy and deflationary pressure can last longer than anybody imagines. The longer they last, the trickier and more inflationary the exit may prove.
Those who expect a swift return to the business-as-usual of 2006 are fantasists. A slow and difficult recovery, dominated by de-leveraging and deflationary risks, is the most likely prospect. Fiscal deficits will remain huge for years. The alternatives – liquidation of excess debt via either a burst of inflation or mass bankruptcy – will not be permitted. The persistently high unemployment and low growth may even threaten globalisation itself. Depending heavily on massive monetary expansion and fiscal deficits in erstwhile high-spending countries will ultimately be unsustainable. As I have argued, the stronger is the growth in demand in erstwhile surplus countries, relative to potential GDP, and so the more powerful is global rebalancing, the healthier will be the global recovery. Is this going to happen? I doubt it.
If the exit into vigorous recovery seems still so uncertain, has the world at least been learning the right lessons for future management of the world economy? I believe not. The financial sector that is emerging from the crisis is even more riddled with moral hazard than the one that went into it. Its fundamental weaknesses are not yet redressed. Questions also remain about the working of the dollar-based international monetary system, the right targets for monetary policy, the management of global capital flows, the vulnerability of emerging economies, demonstrated in central and eastern Europe, and, not least, the financial fragility demonstrated so often and so painfully over the past three decades. However difficult the recovery may be, we must not ignore these questions. After my summer break, I look forward to addressing them in September.
Exxon says algae fuels project may cost billions
Exxon Mobil said on Tuesday said final development of its new research project to make fuels from algae will cost billions. "We need to be realistic," Emil Jacobs, vice president of of research at Exxon, told reporters on a conference call. "This is not going to be easy, and there are no guarantees of success." The world's largest publicly traded company plans to spend $600 million over the next five or six years to develop biofuels from algae with its partner Synthetic Genomics Inc (SGI), a privately held company focused on gene-based research.
Last Year's Excuses Are Gone. Come On Already
by Ralph Nader
A few days ago, a citizen asked the progressive legislator from California, Congressman Henry Waxman why he took his name off the list of about Eighty House sponsors of single-payer health insurance? Mr. Waxman replied: "it [H.R. 676] isn't going to happen."
In early January and last year, Americans who believe in Presidential accountability for constitutional, statutory and treaty violations asked Democrats in Congress-"If not impeachment, why not at least a resolution of censure of George W. Bush and Dick Cheney?" The uniform reply was "It's not practical." These lawmakers-Democrats all, who are the majority in Congress and who agree with these questioners-keep saying "It's not going to happen" or "It's not practical."
"It's just not practical" to provide a federal minimum wage equal to that in 1968, inflation adjusted, which would be $10 an hour. "It's not going to happen" to get comprehensive corporate reform at a time when a corporate crime wave and the Wall Street multi-trillion dollar collapse on Washington, on taxpayers and on the economy is tearing this country apart. A little regulatory tinkering is all citizens are told to expect.
"It's just not practical" to give workers, consumers and taxpayers simple facilities for banding together in associations with their own voluntary dues to defend these interests in the corporate occupied territory known as Washington, D.C. Last year, the excuse was a Bush veto. So the Democrats didn't even try to advance reforms they believe in, knowing Bush and his Republican Party would stonewall. What's the excuse this year with Obama in the White House?
After all, it was only a year and a half ago when nominating and then electing an African-American President was "not going to happen, was not practical." But since it did happen, why aren't these and many other long overdue beneficial redirections and efficiencies happening for the American people? Why aren't there rollbacks, at least, of the Bush-driven inequities and injustices that have so damaged the well-being of working people?
Why isn't a simpler and more efficient carbon tax more "practical" than the complex corruption-prone, corporatized cap and trade deal driven by Goldman Sachs and favored by most Democrats? The avaricious tax cuts for the super-wealthy are still there. The statutory ban on Uncle Sam negotiating volume discounts on medicines purchased by the federal government are still there. Taking the huge budgets for the Bush wars in Iraq and Afghanistan off their annual fast track, and putting them a meaningful House and Senate Appropriations Committee hearing process has not happened.
Face it, America. You are a corporate-controlled country with the symbols of democracy in the constitution and statutes just that-symbols of what the founding fathers believed or hoped would be reality. Even when the global corporate giants come to Washington dripping with crime, greed, speculation and cover-ups, and demand gigantic bailouts on the backs of taxpayers and their children, neither the Republicans nor the now majority Democrats are willing to face them down.
The best of America started with our forebears who faced down those who told them "it's not going to happen," or "it's not practical" to abolish slavery, give women the right to vote, elevate the conditions of workers and farmers, provide social security and medicare, make the air and water less polluted and so on. These pioneers, with grit and persistence, told their members of Congress and Presidents-"It is going to happen."
To paraphrase the words of a great man, the late Reverend William Sloan Coffin, it is as if those legendary stalwarts from our past, knowing how much more there is to achieve a practical, just society, are calling out to us, the people today, and saying "get it done, get it done!"
Risk Surges in Emerging Markets
Emerging markets, we're told, are the best bet for riding out the ongoing economic storm. Investors should therefore be afraid. Very afraid. Since global equity markets swooned this March, stocks have staged an impressive rally. And even more impressive than the S&P 500's 43% gain, developing countries, as measured by the MSCI Emerging Market Index, have leapt more than 75%. The outlook, however, remains cloudy. According to Bloomberg, emerging market shares are more expensive than they've been since 2007, as measured by their price-to-earnings ratio. The last time developing-economy stocks hit this level, they subsequently lost half their value.
With the developed world reeling from a wicked debt-inspired hangover, emerging markets have been widely viewed as a relatively safe bet on eventual economic recovery. This viewpoint is contrary to history, as stock markets in developing countries have traditionally been far more volatile than their more established neighbors. This time, however, was supposed to be different. Developing nations were in some sense better-positioned to handle a deflationary debt unwind of epic proportions: Their consumers are less dependent on debt to survive, as personal credit cards and home loans are far less prevalent than in the US. As credit markets froze up and the pipelines of free and easy debt went dry, consumers in Brazil, India, Peru, and Ghana could continue their cash-wielding ways with little interruption.
Furthermore, many developing economies rely heavily on commodity exports to bigger, wealthier nations. And even though oil, copper, and wheat prices have tumbled from last year's highs, persistent demand for these essential goods should buoy emerging markets -- even as a broader economic recovery remains elusive. As evidence of the ongoing rebalancing of the the world economic scene, Petro China has blown past Exxon as the biggest company in the world by market capitalization. Indeed, 5 of the 10 biggest firms in the world now hail from China.
Lastly, as developing countries, well, develop, income disparities often narrow, as a new middle class evolves into a formidable consumer group. So even as the global economy contracts, individual counties can still grow as millions of people join the mainstream economy. This is all well and good, but this isn't the first time investors have gotten a bit ahead of themselves with optimistic expectations for emerging markets -- in mid-2007 and in 2000. What followed in both instances was not something investors would care to repeat.
And despite great strides in the development of more robust capital markets, broadly more stable governments and inflation that has run less rampant than in the past (Zimbabwe, of course, notwithstanding) , emerging economies remain on shaky ground. Many are reliant on just a few exports -- usually commodities -- to sustain growth, which leaves their economic fate at the whims of volatile markets for raw goods. Russia, Ecuador and Venezuela have all suffered as crude oil tumbled from it's highs last summer. These and other export-dependent countries still rely largely on bigger, more developed countries to buy their wares.
Latin America has rebounded from its debt crisis of the 1980s, but Argentina seems to be sliding back to its wayward ways and Ecuador, the Andean little brother of Hugo Chavez's Venezuela, recent defaulted on some of its sovereign debt, calling it "illegal." It is no doubt that in the past 10 years, developing nations have been the leading engine for economic growth around the world (well, that and an historic debt bubble caused by reckless monetary policy and irresponsible borrowing in developed countries).
And while it is certainly reasonable to expect these emerging economies to benefit as the United States, Europe and Japan rejigger their aging, bureaucracy-laden economies, to call them a safe harbor during turbulent economic times is borderline lunacy. With potential reward comes risk. No matter how the global economic paradigm shifts in the coming years, this won't change.
France’s 'special bond’ raises doubts over AAA rating
Fitch Ratings is paying close attention to French plans for a “special national bond” to raise up to €80bn for projects outside the normal budget. While there is no immediate threat to France’s elite 'AAA’ rating, the agency said concerns may mount if the country fails to map out a clear path towards fiscal discipline over the next year or so. President Nicolas Sarkozy plans to use the `national bond’ to fund research, hi-tech industries, and green energy, railways, and possibly defence, raising suspicions that the gambit is just a second “stimulus plan” dressed up as investment.
“Money is fungible,” said Brian Coulton, head of sovereign ratings for Europe at Fitch. “The question is whether this is a substitute for other spending that they were going to do anyway. Although France has been less exposed to the financial crisis than Britain or the US, it started with a higher debt level, so it has less headroom. Finances are getting stretched to a significant degree. We expect to see announcements of stronger consolidation in all the main AAA countries in 2010, including France,” he said.
The exact size of the special bond is still unclear. Barclays Capital said it was likely to be cut back to below €40bn, but even that would push the budget deficit to 10.4pc of GDP next year. The overall public debt would rise to 89pc, potentially the highest of the AAA club of states. The level of extra spending would be breach the spirit of the Maastricht Treaty and risk a confrontation with Germany over the basic ground rules of Europe’s monetary union. The special bond or “Emprunt” has caused intense controversy in France, where there is already deep concern over rising debt and state liabilities.
Former presidential candidate Francois Bayrou called the plan “surreal”. “We already have a budget deficit of €140bn. Is there no limit to this excess. At the end of the day, this is debt that we will have to repay,” he said. Mr Sarkozy appears more concerned about the rumblings of discontent in France’s industrial cities, where angry workers have begun to take the law into their own hands with “boss-knappings” and threats to sabotage plant.
Eurozone output rise weaker than expected
The volume of goods leaving eurozone factories rose in May in the first pick-up since last August, although the upturn was weaker than expected and was accompanied by signals that German investors think any rebound there could be sluggish. Industrial production in the 16-member currency region rose 0.5 per cent in May, although output was still 17 per cent below the level seen the year before, the European Union’s statistics office said.
Strong monthly increases reported by Germany, France and Italy in recent days had led economists to expect a bounce of 1 per cent in May. However, these hopes were dashed by output decreases in Spain and some smaller countries. “All told, the weaker-than-expected rise on the month was something of a surprise and will damp any hopes of a strong rebound in euro-area activity,” said Colin Ellis at Daiwa Securities. Underlining this caution, German investor sentiment in June decreased for the first time after eight straight months of gains, according to the the Mannheim-based ZEW Centre for European Economic Research.
The ZEW’s index of economic expectations, a closely watched leading indicator of future trends, fell to 39.5 points from 44.8 in May, disappointing economists, who had expected the mood of investors to continue rising. Expectations had risen after last week’s news that orders and output recorded by German companies rose in May, in a sign Europe’s largest economy might be clawing its way back from recession. But Andreas Rees of Unicredit said the ZEW trend now suggested German growth would return in the second half of the year, only to slow again at the start of 2010 as companies stopped restocking and stimulus spending ended.
Although German officials last week cheered signs that the economy had bottomed out, Berlin still expects the economy to shrink by up to 6 per cent this year, providing a significant drag on the entire eurozone. The International Monetary Fund last week said it expected gross domestic product in the currency bloc to shrink 4.8 per cent this year and a further 0.3 per cent in 2010. Despite the recent increase in orders and output in some countries, many economists still expect this trend to turn out short-lived as companies replace depleted stocks and then stop purchasing. ”For significant, sustainable manufacturing recovery to develop [in the eurozone] there needs to be an extended pick up in orders,” said Howard Archer at HIS Global Insight. “This currently remains highly uncertain.”
Ilargi: How funny is it exactly if the New York Times runs an article that accuses Germany of "... failing to clean up its banks decisively"? If that carries the risk of becoming the next Japan, then what does the future hold for the US ?
Germany Must Act to Avoid Its Own 'Lost Decade'
Is Germany the new Japan? Germany, the biggest European economy, is well on its way to making a key mistake blamed for Japan’s “lost decade” of economic stagnation in the 1990s — failing to clean up its banks decisively. The obstacles are political rather than financial. Berlin seems determined to avoid telling voters the bad news before a Sept. 27 general election about banks’ expected losses and the likely cost to the taxpayer.
Instead, the government is allowing banks to conceal or defer the full extent of their losses on toxic securities and bad loans and refusing to subject them to public stress tests or to require them to increase their capital. In doing so it risks perpetuating “zombie banks” that are too sick to lend to businesses and households. “There are very strong political reasons for the policy paralysis,” said Nicolas Véron of Bruegel, an economic research group in Brussels. “Nothing can happen before the German election. But Japan waited a decade. We can wait three months.”
It is no surprise that when the European Central Bank flooded euro-zone banks with €442 billion, or $616 billion, in liquidity last month, most preferred to deposit the money back with the E.C.B. in overnight deposits or put it in safe government bonds, rather than lend to the real economy. Despite jawboning from the E.C.B.’s president, Jean-Claude Trichet, and threats by the German finance minister, Peer Steinbrück, the banks are effectively on a lending strike because their problem is not liquidity but solvency.
Eager to avoid a credit crunch before the election, Mr. Steinbrück failed to persuade his European Union peers last week to suspend bank capital adequacy rules, pending changes due this year. He was also rebuffed by the Bundesbank, Germany’s central bank, when he appeared to endorse the idea of its lending directly to businesses to bypass a frozen capital market. Banks are expecting more loans to go sour and heavier losses on impaired assets as the recession bites deeper, eating into their capital bases. Their instinct is to draw in their horns and reduce leverage, since excessive leverage is what got them into the mess in the first place.
The E.C.B.’s latest Financial Stability Review explains why. It estimates that euro-zone banks face a further $283 billion in write-downs by the end of 2010 on top of the $366 billion in losses written off since the crisis began in mid-2007. Rather than requiring banks to recognize those bad assets and remove them from their balance sheets, most euro-zone governments have been playing for time, seemingly hoping that something will turn up.
Close links between Germany’s banks and its political establishment are another reason for reluctance to carry out painful restructuring. The regional Landesbanks and savings banks are key levers of political patronage. In an earlier role as state premier of North Rhine-Westphalia, Mr. Steinbrück was a negotiator with the European Commission on behalf of WestLB and other state-controlled Landesbanks. Of the private-sector banks, Commerzbank is on government life support.
Germany’s bad-bank plan for commercial and state banks is designed to stretch the problem out over the next two decades rather than resolve it. Banks may voluntarily put toxic assets into special purpose vehicles guaranteed by the state until maturity, paying an annual fee. But if the assets are worth less at the end than the price assessed by an independent valuer, the liability rests with the banks, not the taxpayer.
Italy, France, the Netherlands, Belgium and, to a lesser extent, Spain are all in denial about the extent of their banking problems, although the Dutch, Belgians and French have had to spend billions of euros of taxpayers’ money to save Fortis, ABN Amro, ING and Dexia. Spain has been bolder, creating a €99 billion bank rescue fund, which is expected to lead to a wave of restructuring, alliances and bailouts after the country’s housing bubble burst. So what does the euro zone have to do to avoid a Japanese-style prolonged period of stagnation with zombie banks?
Governments should start by telling voters and markets the truth about their banks’ exposures. Far from undermining confidence in all banks, as Mr. Steinbrück contends, disclosure would restore trust in sound institutions and dispel general suspicion. They should then compel banks that are found wanting to increase their equity capital, either from private investors if they can, or from the state if they must. This may lead to a temporary nationalization of some sick banks, as Britain did with Royal Bank of Scotland. Ultimately, banks that are not viable must be broken up or closed down.
The European Commission’s competition department and the Committee of European Banking Supervisors can provide pan-European political cover for governments that fear taxpayers’ wrath over bailing out banks with public money. The way should be clear once Germany has voted. It would be dangerous to delay any longer. As the Japanese example shows, procrastination merely increases the long-term pain.
UK cost of living falls most since 1948
The cost of living in Britain last month fell the most since records began more than half a century ago, as the recession drove down the cost of food and housing. The broad measure of inflation, known as RPI, slumped 1.6pc on annual basis - its steepest decline since statisticians began compiling the figures in 1948. Compared with May, RPI climbed 0.3pc - in line with City expectations. Prices for a range of staples - including meat, bread, fruit, vegetables and dairy products - all fell as retailers sought to keep a lid on prices to attract shoppers.
The figures underline how the recession, which began in the second quarter of last year, has drained pricing power across the economy. The Bank of England has signalled it expects to keep interest rates at a record low of 0.5pc in an effort to provide some life support to the economy. We still believe "the bulk of the disinflationary effects of the deep recession in the economy have yet to be seen" said Jonathan Loynes, an economist at Capital Economics.
The measure of inflation the Bank uses to set interest rates also fell below its target rate of 2pc for the first time since 2007. Consumer price inflation dipped to 1.8pc on an annual basis in June from 2.2pc. Despite the steep annual fall in prices, not all economists are agreed deflation will deepen. As the predominant effect on the RPI comes from lower rates on mortgage interest payments, we would categorically assert that this is not an example of deflation,” said Philip Shaw, economist at Investec.
House prices fall 12.5% year-on-year
The price of the average UK house fell by 12.5% in the year to May, government figures showed today. However, the pace of price falls has slowed, according to the monthly house price index published by the department of Communities and Local Government. In the quarter leading to May, prices edged down by 0.4%, compared with a drop of 4.8% in the quarter ending in February 2009.
Falls were steepest in Northern Ireland, where the price of a house has plummeted by 23.2% over the year. Average prices fell by 12.8% in England, 8.8% in Wales and 6.9% in Scotland. According to today's figures, first-time buyers paid 14.8% less for a property in May 2009 than they had in the same month last year. Owner-occupier price falls were slightly less pronounced, with prices dropping an average 11.6%.
The figures lag behind those issued by the lenders, which recently published indices for June. Last week, Halifax reported a year-on-year fall of 15%, while Nationwide said prices had gone down by 9.3% over the year, despite a monthly rise of 0.9% in June. Estate agents have been reporting signs of improvement in the property market, but many economists expect a sustainable recovery will be a long time coming.
Simon Rubinsohn , chief economist at the Royal Institution of Chartered Surveyors, said the government's data provided further evidence that house prices were stabilising. "The May figures show that prices across the UK were essentially unchanged compared with April. Month-on-month, prices actually rose in Scotland and Wales, fell slightly in England and more so in Northern Ireland.
"The flatter trend in prices signalled by this report follows the lead provided by the monthly RICS survey which showed price expectations amongst surveyors turning positive for the first-time since May 2007. Significantly, the lack of new instructions of property to agents is providing a key element of support for the market." Meanwhile, consultancy PricewaterhouseCoopers said today that recent signs of a recovery were a false dawn and predicted that prices would continue to fall over the next year, and that it was likely a recovery in house prices would stay modest until "the middle of the next decade".
Europe launches Nabucco gas pipeline to escape Russian bondage
After years of wrangling, Europe and Turkey have agreed to launch the "Nabucco" pipeline to tap into the vast gas reserves of Central Asia and break Russia's stranglehold on energy supplies to the West. The $11bn project - named after the Verdi opera, symbolizing freedom from bondage - will in theory link Western Europe through a 2,000-mile pipeline to the Caspian region, though it has no contracts yet and may never secure them if the Kremlin prevails.
Russian energy tsar Konstantin Simonov said the deal was merely a "piece of paper", clearly relishing the cut and thrust of the modern "Great Game". The consortium from Austria, Hungary, Bulgaria, Romania, and Turkey will issue tenders later this year. It aims to be in service by 2014 with an initial target of 31bn cubic meters a year, equal to a quarter of current supply from Russia's Gazprom . Jose Barroso, the European Commission's president, said the venture was a top strategic priority for Europe. "We are determined to make the Nabucco pipeline a reality as quickly as possible".
Nabucco will rely on Azerbaijan in the early phase, but as spokes are added into Turkmenistan, Kazakhstan, Iraq, and perhaps Iran, it could double capacity again. Professor Alan Riley from City Law School said the project has the potential to change the Eurasian balance of energy power and keep a lid on the long-term price of gas. "What Russia is really worried about is the snowball effect as the great arc of countries from Turkmenistan down to Iraq start to take part," he said.
Recent studies suggest that Turkmenistan may have much larger reserves than originally thought, perhaps as much as half of all gas fields in Russia put together. Gazprom's reserves are increasingly in the Artic 'High North', at depths of 300m, and prohibitive to extract. Nabucco's first challenge, however, is to find anybody in Central Asia willing to defy the Russia and sell gas. The Kremlin considers the Caspian to be a sea rather than a lake, giving it rights under "international" law to veto pipelines along the water bed. It has beefed up its naval presence to make the point.
US energy envoy Richard Morninstar said Nabucco would not be viable unless it can tap into Azerbaijan's Shah Deniz II field. The Azeris have been equivocating so far, playing one side off against another. Giles Merrit, head of the Security and Defence Agenda in Brussels, said Nabucco is tinged with triumphalist posturing. "It's a bit premature to think that at one bound we are free of Russia's ability to dictate. The project is pretty expensive at a time when not a lot of of money is sloshing around," he said. The European Investment Bank and other EU bodies are to provide a quarter of the funding. It is far from clear whether private investors will come up with serious money until there are firm delivery contracts.
Still, analysts say the Kremlin may have misjudged badly in using its gas weapon to bully Ukraine and the Baltic States over recent years. The effect has been to create a united front of disparate countries determined to escape Russia's grip, whether through alternative gas pipelines, or liquefied natural gas from Algeria and the Gulf Russia is pushing its own 'South Stream' pipeline at enormous cost through the deep waters of the Black Sea to head off Nabucco. Professor Riley said the "fantastical" project would stretch Gazprom's finances to breaking point. "It is just a spoiler," he said.
How Madoff Will Be Killed In Jail
Larry Levine of Wall Street Prison Consultants laid out Bernie Madoff's grisly demise today on Fox Business. How's it going to go down? Some international banker who was burned by Madoff will peel off a few million dollars, give it to the family of an Butner inmate. Then, a distraction will be made in the dining hall, during the commotion--BOOM!--Madoff is getting stabbed. "I see Bernie leaving in a bag or a box," says Levine. So much for Butner being the "crown jewel of the prison system."
Engineers and techies are often misunderstood. They come off as looking cheap when in fact they are optimizers. It is their nature to solve any puzzle that is presented, and the persistent puzzle of life involves getting the most resources while expending the least.
I have a bit of that in me too. That's why my mental hobby for a few decades has been designing what I call Cheapatopia. Cheapatopia is a hypothetical city, designed from scratch to be an absurdly cheap place to live with a ridiculously high quality of life.
Step one in designing Cheapatopia is assembling the team of visionaries. That's you. I appoint myself team leader, and over the next week or so I will describe the elements of Cheapatopia and ask you to suggest the best design solutions.
Today I will discuss some assumptions. The first and biggest assumption is that the era of ridiculous consumption is over, at least for your lifetime. If we want universal healthcare, and a decent standard of living for the exploding population of seniors, the average household will have to learn how to make do with less. But in doing so, there is no reason we can't be happier at the same time, so long as we do it right.
Cheapatopia puts a big emphasis on entertainment and social interaction. If you have that, plus health, safety, and financial security, you might be willing to give up the over-consumption and needless complexity of your old life.
You might also be willing to give up some of the options you enjoy in your current life if the tradeoff is gaining more and better options of a different sort. We'll consider those later.
I believe the next big change in society will involve simplifying our lives, getting rid of the waste and inconvenience that we drifted into, and finding meaning through more social involvement. Cheapatopia would be an engineered city both in terms of its physical structure and in how the citizens participate in it.
For example, in Cheapatopia, no one would ever again hire a babysitter or put their dog in the kennel while they are on vacation. That sort of thing would all be done by neighbors, and you would know those neighbors well.
When you design Cheapatopia, don't assume you would be living there yourself. It won't be for everyone. Don't hold that against Cheapatopia. It's a mental exercise.
Today's design question is this: Where would you locate Cheapatopia, in general terms?
In your answer consider physical beauty, energy, weather, water, proximity to a major airport, natural disasters, and anything else you can think of. And assume Cheapatopians work at home or within the city, so commuting is minimal.
Ilargi: TAE on YouTube?! People talk about us, that I can see. It's good to see we can make, or rather help, people think.
First, Nick from France reading me aloud on YouTube. At first I thought: this is how I picture respected commenter El Gallinazo.
Then, another monologue. Needs a bit more "to the pointiness" (how do I say what I want to say?), but his passion makes it worth it.
If there’s more out there that address us, reference us, steal from us, send them to our email address in the left hand column.
Market Mover Meredith
It's Just Surreal